The bull market has lifted all boats, but life insurers have outperformed dramatically. The Dow Jones U.S. Life Insurance Index has risen 57% this year, compared to a 24% increase for the S&P 500
MetLife's shares closed at $51.19 Thursday, returning 59% this year. The shares trade for 1.1 times their reported Sept. 30 book value of $47.99, excluding other comprehensive income. The share trade for 9.0 times the consensus 2014 earnings estimate of $5.71 a share, among analysts polled by Thomson Reuters, and for 8.3 times the consensus 2015 EPS estimate of $6.15. Out of 23 sell-side analysts polled, 19 rate MetLife a "buy," while the remaining four analysts all have neutral ratings on the shares.
The company reported earnings available to common shareholders for the first three quarters of $2.369 billion, or $2.14 a share, increasing from $1.106 billion, or $1.03 share, during the first three quarters of 2012. The earnings improvement reflected a $1.868 billion goodwill impairment on its U.S. annuities business. Operating earnings before taxes, investment and derivative gains and losses and various accounting adjustments for the first three quarters totaled $6.637 billion, increasing from $6.162 billion a year earlier, mainly reflecting an increase in fee income from universal life and investment products.
MetLife reported an operating return on common equity of 10.4% for the third quarter. As part of its year-end investor presentation on Thursday, the company said it had made no major change in strategy, but that its operating return on equity was expected to improve to a range of 12% to 14% in 2016.
During a conference call with analysts on Thursday, MetLife resident William Wheeler said "We expect to build on this very strong year and are projecting solid growth in both revenue and earnings for 2014."
A very important market development for the company during 2014 will be the tapering of the Federal Reserve's "QE3" purchases of long-term U.S. Treasury bonds and agency mortgage-backed securities. These purchases have been running at a net monthly pace of $85 billion since September 2012, and have been meant to hold long-term interest rates down. In anticipation of the central bank's announcement of a gradual lowering of the bond purchases -- which could happen as early as next Wednesday following the Federal Open Market Committee's policy meeting -- investors have sent the yield for 10-year U.S. Treasury bonds to 2.87% from 1.70% at the end of April.
All insurers rely heavily on investment income, so the historically low interest-rate environment has been very difficult for life insurers. MetLife's own assumptions are factoring in an increase in the yield on the 10-year bond to 3.36% at the end of 2014 and 4.50% "by the end of 2016."
Deutsche Bank analyst Yaron Kinar in a report on Nov. 14 wrote that U.S. life insurers since 1997 had traded at current valuation averages "when 12- month forward yields [for 10-year U.S. Treasury Bonds] were in the 3.0-3.5% range." Kinar added that "Current valuations imply a ~3% 10Y 12 months ahead, whereas the introduction of tapering by March '14 would likely mean that yields move into 3.5% territory or above, and expectations of further increases would rise."
On that basis, Kinar wrote that MetLife offered "the most upside" among life insurance stocks under his coverage.
Following MetLlife CFO John Hele's disclosure on Thursday that its fourth-quarter earnings would be affected by "a fourth-quarter litigation asbestos reserve charge of $100 million to $120 million after-tax," Kinar reiterated his "buy" rating for MetLife and price target of $59, while leaving his earnings estimates for 2014 and 2015 unchanged.
What About Buybacks?
In a note to clients late Thursday, Yaron wrote, "based on our current earnings estimates, the company should generate roughly $800mm of incremental capital in '14 and another $1.3 bil increase in '15, for a total of nearly $6 bil ($5.30/ps) over the next two years."
Investors are wondering when some of MetLife's excess capital might be deployed. The company pays a quarterly dividend of 27.5 cents a share, for a yield of 2.15%. However, MetLife hasn't been buying back common shares.
MetLife CEO Steven Kandarian during the presentation on Thursday said the firm's return on equity target for 2016 "assumes that regulatory capital rules appropriately reflect the life insurance business model and that we have clarity in the rules and a reasonable timeframe, allowing for meaningful share repurchases prior to 2016."
"Regulatory uncertainty remains our primary challenge, a view that we have consistently expressed to investors," Kandarian added. MetLife has said previously that it won't announce share repurchase plans until it receives greater clarification from regulators on whether or not it will be treated as a non-bank systemically important financial institution (SIFI). Under that scenario MetLife's annual plans to deploy capital would be reviewed by the Federal Reserve.
"We are hopeful that we will be able to get things resolved on the regulatory front before the end of 2016, and that we will be able to do some share repurchases. But at this point in time, I really can't commit to what that number will be because we don't know the outcome yet of our potential non-bank SIFI designation," Kandarian said. He also said the company wouldn't repurchase any shares during 2014.
Love From Other Analysts
"We are maintaining our $5.81 2014 operating EPS estimate. In addition, we are increasing our target price to $57 from $55 on the basis of higher expected core EPS results," Credit Suisse analyst Thomas Gallagher wrote in a note to clients on Thursday, following MetLife's presentations. Gallagher rates MetLife "outperform."
While noting that MetLife didn't provide specific EPS guidance for 2014, Gallagher wrote that "MET's guidance implies about $5.85-$5.95 of operating EPS for 2014."
KBW analyst Jeffrey Schuman also rates MetLife "outperform," with a $57 price target, writing in a note to clients Thursday that he came away from the presentations with "more optimism about our expectation that Group underwriting results should improve in 2014."
With MetLife projecting an increase in expenses during 2014 because of "enterprise initiatives," Schuman lowered his 2014 EPS estimate slightly to $5.77 from $5.80.
MetLife's shares were down slightly in morning trading Friday, to $51.17.
Interested in more on MetLife? See TheStreet Ratings' report card for this stock.
-- Written by Philip van Doorn in Jupiter, Fla.
>Contact by Email.